BUY (TCAP, $19.55)
Internally Managed, Disciplined Originator with Strong Growth Prospects and Prudent Capital Management - Initiating With A BUY Rating And $22 Price Target.
October 24, 2016
Christopher R. Testa
Investment Conclusion. We are initiating coverage of Triangle Capital Corp. (TCAP) with a BUY rating and $22 price target. Triangle is predominantly a subordinated lender, with subordinated debt and second lien notes comprising 69.7% of the portfolio at fair value as of 6/30/16 compared with 13.6% of senior debt and first lien notes. While this is certainly riskier given the subordinated position in the capital stack, Triangle utilizes conservative attachment point leverage (weighted average net debt/EBITDA) when structuring its investments. The attachment points are typically slightly above 4.0x through the company’s last dollar of risk. The company had a rough start to the year as its former CEO retired during 1Q16 which caused a significant hit to NII/share ($0.16), as did a reversal of dividend income they received the year prior. Backing out the onetime charges pertaining to the CEO’s retirement the company still earned only $0.45/share of NII, below the regular dividend of $0.54/share in 1Q16 before it was cut to $0.45/share during the second quarter. The company has emphasized that management grasps the reality of spread compression and are committed to preserving NAV/share; two notions that we certainly agree with. During 3Q16 Triangle completed a highly accretive secondary offering at a 34% premium to 2Q16 NAV/share and raised an estimated $129.1 million in net proceeds. The equity offering, combined with what we expect will be additional SBA debentures granted in 2017, will likely permit robust portfolio growth without the need for further equity issuance through 2016 and 2017. Our $22 price target implies an estimated 2017 P/NII of 11.3x, dividend yield of 8.2%, and P/NAV of 1.35x compared to the BDC sector averages of 9.0x, 10.2%, and 0.90x, respectively.
Source: S&P Capital IQ, National Securities Corporation Estimates
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